DBRS Morningstar Finalizes Provisional Ratings on Connecticut Avenue Securities Trust 2022-R09

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the Connecticut Avenue Securities (CAS), Series 2022-R09 Notes (the Notes) issued by Connecticut Avenue Securities Trust 2022-R09 (CAS 2022-R09):

-- $292.6 million Class 2M-1 at A (low) (sf)
-- $83.6 million Class 2M-2A at BBB (high) (sf)
-- $83.6 million Class 2M-2B at BBB (sf)
-- $83.6 million Class 2M-2C at BBB (sf)
-- $23.8 million Class 2B-1A at BBB (low) (sf)
-- $23.8 million Class 2B-1B at BB (sf)
-- $250.8 million Class 2M-2 at BBB (sf)
-- $47.7 million Class 2B-1 at BB (sf)
-- $83.6 million Class 2E-A1 at BBB (high) (sf)
-- $83.6 million Class 2A-I1 at BBB (high) (sf)
-- $83.6 million Class 2E-A2 at BBB (high) (sf)
-- $83.6 million Class 2A-I2 at BBB (high) (sf)
-- $83.6 million Class 2E-A3 at BBB (high) (sf)
-- $83.6 million Class 2A-I3 at BBB (high) (sf)
-- $83.6 million Class 2E-A4 at BBB (high) (sf)
-- $83.6 million Class 2A-I4 at BBB (high) (sf)
-- $83.6 million Class 2E-B1 at BBB (sf)
-- $83.6 million Class 2B-I1 at BBB (sf)
-- $83.6 million Class 2E-B2 at BBB (sf)
-- $83.6 million Class 2B-I2 at BBB (sf)
-- $83.6 million Class 2E-B3 at BBB (sf)
-- $83.6 million Class 2B-I3 at BBB (sf)
-- $83.6 million Class 2E-B4 at BBB (sf)
-- $83.6 million Class 2B-I4 at BBB (sf)
-- $83.6 million Class 2E-C1 at BBB (sf)
-- $83.6 million Class 2C-I1 at BBB (sf)
-- $83.6 million Class 2E-C2 at BBB (sf)
-- $83.6 million Class 2C-I2 at BBB (sf)
-- $83.6 million Class 2E-C3 at BBB (sf)
-- $83.6 million Class 2C-I3 at BBB (sf)
-- $83.6 million Class 2E-C4 at BBB (sf)
-- $83.6 million Class 2C-I4 at BBB (sf)
-- $167.2 million Class 2E-D1 at BBB (sf)
-- $167.2 million Class 2E-D2 at BBB (sf)
-- $167.2 million Class 2E-D3 at BBB (sf)
-- $167.2 million Class 2E-D4 at BBB (sf)
-- $167.2 million Class 2E-D5 at BBB (sf)
-- $167.2 million Class 2E-F1 at BBB(sf)
-- $167.2 million Class 2E-F2 at BBB (sf)
-- $167.2 million Class 2E-F3 at BBB (sf)
-- $167.2 million Class 2E-F4 at BBB (sf)
-- $167.2 million Class 2E-F5 at BBB (sf)
-- $167.2 million Class 2-X1 at BBB (sf)
-- $167.2 million Class 2-X2 at BBB (sf)
-- $167.2 million Class 2-X3 at BBB (sf)
-- $167.2 million Class 2-X4 at BBB (sf)
-- $167.2 million Class 2-Y1 at BBB (sf)
-- $167.2 million Class 2-Y2 at BBB (sf)
-- $167.2 million Class 2-Y3 at BBB (sf)
-- $167.2 million Class 2-Y4 at BBB (sf)
-- $83.6 million Class 2-J1 at BBB (sf)
-- $83.6 million Class 2-J2 at BBB (sf)
-- $83.6 million Class 2-J3 at BBB (sf)
-- $83.6 million Class 2-J4 at BBB (sf)
-- $167.2 million Class 2-K1 at BBB (sf)
-- $167.2 million Class 2-K2 at BBB (sf)
-- $167.2 million Class 2-K3 at BBB (sf)
-- $167.2 million Class 2-K4 at BBB (sf)
-- $250.8 million Class 2M-2Y at BBB (sf)
-- $250.8 million Class 2M-2X at BBB (sf)
-- $47.7 million Class 2B-1Y at BB (sf)
-- $47.7 million Class 2B-1X at BB (sf)

Classes 2M-2, 2A-I1, 2A-I2, 2A-I3, 2A-I4, 2E-A1, 2E-A2, 2E-A3, 2E-A4, 2B-I1, 2B-I2, 2B-I3, 2B-I4, 2E-B1, 2E-B2, 2E-B3, 2E-B4, 2C-I1, 2C-I2, 2C-I3, 2C-I4, 2E-C1, 2E-C2, 2E-C3, 2E-C4, 2E-D1, 2E-D2, 2E-D3, 2E-D4, 2E-D5, 2E-F1, 2E-F2, 2E-F3, 2E-F4, 2E-F5, 2-J1, 2-J2, 2-J3, 2-J4, 2-K1, 2-K2, 2-K3, 2-K4, 2-X1, 2-X2, 2-X3, 2-X4, 2-Y1, 2-Y2, 2-Y3, 2-Y4, 2M-2Y, 2M-2X, 2B-1, 2B-1Y, and 2B-1X are Related Combinable and Recombinable Notes (RCR Notes). Classes 2A-I1, 2A-I2, 2A-I3, 2A-I4, 2B-I1, 2B-I2, 2B-I3, 2B-I4, 2C-I1, 2C-I2, 2C-I3, 2C-I4, 2-X1, 2-X2, 2-X3, 2-X4, 2-Y1, 2-Y2, 2-Y3, 2-Y4, 2M-2X, and 2B-1X are interest-only RCR Notes.

The A (low) (sf), BBB (high) (sf), BBB (sf), BBB (low) (sf), and BB (sf) ratings reflect 2.800%, 2.500%, 1.900%, 1.575%, and 1.250% of credit enhancement, respectively. Other than the specified classes above, DBRS Morningstar does not rate any other classes in this transaction.

CAS 2022-R09 is the 51st benchmark transaction in the CAS series. The Notes are subject to the credit and principal payment risk of a certain reference pool (the Reference Pool) of residential mortgage loans held in various Fannie Mae-guaranteed mortgage-backed securities. As of the Cut-Off Date, the Reference Pool consists of 95,749 greater-than-20-year, fully amortizing, first-lien, fixed-rate mortgage loans underwritten to a full documentation standard, with original loan-to-value (LTV) ratios greater than 80%. The mortgage loans were estimated to be originated on or after January 2021 and were securitized by Fannie Mae between September 1, 2021, and June 30, 2022.

On the Closing Date, the trust will enter into a Collateral Administration Agreement (CAA) with Fannie Mae. Fannie Mae, as the credit protection buyer, will be required to make transfer amount payments. The trust is expected to use the aggregate proceeds realized from the sale of the Notes to purchase certain eligible investments to be held in a securities account. The eligible investments are restricted to highly rated, short-term investments. Cash flow from the Reference Pool will not be used to make any payments; instead, a portion of the eligible investments held in the securities account will be liquidated to make principal payments to the Noteholders and return amount, if any, to Fannie Mae upon the occurrence of certain specified credit events and modification events.

The coupon rates for the Notes are based on the Secured Overnight Financing Rate (SOFR). There are replacement provisions in place in the event that SOFR is no longer available, please see the Offering Memorandum for more details. DBRS Morningstar did not run interest rate stresses for this transaction, as the interest is not linked to the performance of the reference obligations. Instead, the trust will use the net investment earnings on the eligible investments together with Fannie Mae’s transfer amount payments to pay interest to the Noteholders.

In this transaction, approximately 2.4% of the loans were originated using property values determined by using Fannie Mae's Appraisal Waiver (AW) rather than a traditional full appraisal. Loans where the AW is offered generally have better credit attributes.

The calculation of principal payments to the Notes will be based on the actual principal collected on the Reference Pool. The scheduled and unscheduled principal will be combined and only be allocated pro rata between the senior and nonsenior tranches if the performance tests are satisfied. For CAS 2022-R09, the minimum credit enhancement test is set to pass at the Closing Date. This allows rated classes to receive principal payments from the First Payment Date, provided the other two performance tests—delinquency test and cumulative net loss test—are met. Additionally, the nonsenior tranches will also be entitled to supplemental subordinate reduction amount if the offered reference tranche percentage increases above 5.50%.

The interest payments for these transactions are not linked to the performance of the reference obligations except to the extent that modification losses have occurred.

The Notes will be scheduled to mature on the payment date in September 2042, but will be subject to mandatory redemption prior to the scheduled maturity date upon the termination of the CAA.

The administrator and trustor of the transaction will be Fannie Mae. Computershare Trust Company, N.A. will act as the Indenture Trustee, Exchange Administrator, Custodian and Investment Agent. U.S. Bank National Association (rated AA (high) with a Stable trend and R-1 (high) with a Stable trend by DBRS Morningstar) will act as the Delaware Trustee.

The Reference Pool consists of approximately 10.7% of loans originated under the Home Ready® program. HomeReady® is Fannie Mae’s affordable mortgage product designed to expand the availability of mortgage financing to creditworthy low- to moderate-income borrowers.

If a reference obligation is refinanced under the High LTV Refinance Program, then the resulting refinanced reference obligation may be included in the Reference Pool as a replacement of the original reference obligation. The High LTV Refinance Program provides refinance opportunities to borrowers with existing Fannie Mae mortgages who are current in their mortgage payments but whose LTV ratios exceed the maximum permitted for standard refinance products. The refinancing and replacement of a reference obligation under this program will not constitute a credit event.

The coronavirus pandemic and the resulting isolation measures have caused an immediate economic contraction, leading to sharp increases in unemployment rates and income reductions for many consumers. Shortly after the onset of the pandemic, DBRS Morningstar saw an increase in the delinquencies for many residential mortgage-backed securities (RMBS) asset classes.

Such mortgage delinquencies were mostly in the form of forbearances, which are generally short-term periods of payment relief that may perform very differently from traditional delinquencies. At the onset of the pandemic, the option to forebear mortgage payments was widely available, driving forbearances to an elevated level. When the dust settled, loans with coronavirus-induced forbearance in 2020 performed better than expected, thanks to government aid, low LTVs, and acceptable underwriting in the mortgage market in general. Across nearly all RMBS asset classes in recent months delinquencies have been gradually trending downwards, as forbearance periods come to an end for many borrowers.

For more information regarding the economic stress assumed under its baseline scenario, please see the following DBRS Morningstar commentary: Baseline Macroeconomic Scenarios For Rated Sovereigns: June 2022 Update, dated June 29, 2022.

The ratings reflect transactional strengths that include the following:
-- Seller (or lender)/servicer approval process and quality control platform.
-- Well-diversified reference pool.
-- High-quality credit and loan attributes.
-- Strong alignment of interest.
-- Extensive performance history.

The transaction also includes the following challenges:
-- Representation and warranties framework.
-- Limited third-party due diligence.
-- Counterparty exposure.

The full description of the strengths, challenges, and mitigating factors is detailed in the related report.

There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is RMBS Insight 1.3: U.S. Residential Mortgage-Backed Securities Model and Rating Methodology (April 1, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at [email protected].

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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